Recession is already a reality for much of southern Europe while Germany and France, the bloc's two largest economies, are starting to feel the malaise as Spaniards and Italians buy fewer of their products.

World Bulletin / News Desk

Strong exports limited the euro zone's economic contraction in the second quarter of this year despite falling investment, inventories and private consumption that point to output shrinking overall in 2012.

The EU's statistics office Eurostat confirmed on Thursday that gross domestic product in the 17 countries using the euro fell 0.2 percent quarter-on-quarter. It revised the year-on-year fall to 0.5 percent from a previously reported 0.4 percent.

The debt crisis that began in Greece nearly three years ago has crushed Europe's efforts at recovery from the 2008/2009 global financial crisis, probably sending the bloc into recession for the second time in just three years.

"Weakness is the name of the game," said Joost Beaumont, a senior economist at ABN AMRO in Amsterdam. "We see another contraction in the third quarter because domestic demand will be hit by fiscal consolidation, rising unemployment, tight credit conditions and the high uncertainty of the euro zone crisis."

The euro zone would already be in a technical recession, were it not for flat output in the first three months of the year, after a 0.3 percent quarterly contraction in the last quarter of 2011.

Eurostat said a fall in household consumption subtracted 0.1 percentage point from the final quarterly GDP figure and shrinking investment and inventories took away 0.2 percentage points each, compared with the previous three months.

Strong exports, however, added 0.6 percentage point which, after the negative contribution of imports, left the net result from trade at a positive 0.2 percentage point.

With the Chinese economy slowing and the U.S. economy struggling to build a solid recovery, the euro zone cannot rely on exports to pull it out of the downturn, however.

"Leading indicators continue to point, in broad terms, to more of the same in the third quarter, though with a risk of the external sector softening in line with recent evidence of weakness in manufacturing activity globally," Ken Wattret, a euro zone economist at BNP Paribas, wrote in a note to clients.

Most economists see the euro zone, which generates 16 percent of global economic output, shrinking by at least 0.3 percent this year. A recovery may only come in mid-2013.

In its latest assessment, the Paris-based organisation for Economic Cooperation and Development said on Thursday that Europe's problems were also "dampening global confidence, weakening trade and employment and slowing economic growth".

NO SUPPORT FROM SHOPPERS

The euro zone's biggest hurdle is that Europeans' ability to spend and drive a recovery has been devastated by government lay offs, budget cuts, record joblessness and stubbornly high inflation pushed up by world oil prices.

Data showing a fall in retail sales in July and a contraction in the euro zone's service sector in August, both released on Wednesday, showed the extent of the weakness.

Recession is already a reality for much of southern Europe while Germany and France, the bloc's two largest economies, are starting to feel the malaise as Spaniards and Italians buy fewer of their products.

GDP contracted in Belgium and Finland and stagnated in France, as the problems of the indebted Mediterranean weigh.

"The core is no longer immune to the euro zone crisis," ABN AMRO's Beaumont said.

Retail sales fell sharply in Germany in July and confidence among European consumers fell to a 38-month low in August, which bodes poorly because just over half of the euro zone's economy is generated by domestic spending.

Led by France, EU leaders agreed at a summit in June to inject 120 billion euros ($151 billion) into the European economy to counterbalance public sector layoffs and cuts in spending to bring budget deficits down to sustainable levels.

The European Central Bank cut interest rates to a record low of 0.75 percent in July to cut the cost of borrowing for families and businesses, but neither the bank's move nor the EU's "growth pact" is likely to overcome the downturn.

Investors are instead focused on a policy meeting later on Thursday where the ECB is expected to outline new tactics to cut high borrowing costs for indebted Spain and Italy.

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